We at Notes From Underground have published more than 1,000 posts during the last seven years. I have voiced my displeasure about the annual gathering in Davos for the past five years (last year’s Davos post is below). My battle cry was (ans continues to be): PEPPER SPRAY DAVOS, a response to the heinous police overreaction to the pepper spraying of University of California–Davis students in November 2011. The police POURED pepper spray onto student protesters, a contemptible act of police brutality. I thought if the UC–Davis students were subjected to such a police response for blocking a sidewalk the crony capitalists of global monopolies are surely worthy of such a contemptuous action. The corporate chieftains and their political sycophants, who exchange “insider views” for large speaking fees (and of course a hope to secure a job after leaving political office), have badly damaged the world.
Posts Tagged ‘British pound’
Increased volatility is not debatable. It will be the outcome of the uneasiness of global politics. It seems that the present state of affairs reflects the vast chasm between those who have benefited from GLOBALIZATION and those who have seen their lives and incomes being disrupted by a world experiencing dynamic change. Brexit was a vote of the nationalists versus the Davos crowd, or those seeking the comfort of the world they know versus those who have profited mightily from the first mover advantage of being prepared for the post Berlin-wall global economy. The central banks’ efforts to prevent a massive liquidation of global assets and harm that would have befallen the global economy as left many participants in a state of financial repression.
This is a brief note attached to a spot I did today with CNBC’s Rick Santelli where we discussed the Bank of England’s decision in full. To my great surprise Mark Carney delivered monetary policy on three fronts: 1. Cut the benchmark rate; 2. Began a new round of QE with purchases of 60 billion pounds of Treasury debt with a 10 billion corporate bond buy kicker; and 3. An enhanced Facility Lending Scheme now labeled as Long-Term Funding Scheme (TFS), which is an imitation of the ECB’s TLTRO, which is meant to get the banks lending the additional BOE-provided liquidity. The British domestic banks will incur penalties if they fail to pass the cheap credit into the financial system. My view still stands. The POWER OF THE TFS IS AMPLE STIMULUS AND THE CARNEY-LED MPC SHOULD HAVE HELD THE RATE CUT AND QE IN RESERVE.
The British Pound dropped 1.5% in response to the aggressive BOE action, the Footsie equity index was up almost 2% and the British gilts rallied as the yields on the long-end of the curve dropped 16 basis points. Carney followed his central bankers down the rabbit hole of “got to do something” for there is a supply shock. My criticism is that the BOE governor acted too quickly and should have let markets continued to seek out the real effects of the Brexit vote. Why are central bankers so terrified of the signals that markets provide about the economy? I will focus on the British pound and the GILTS as a weighing mechanism of market sentiment as we move forward. There is still much to digest concerning Brexit and Prime Minister May has shown herself to be flexible in confronting the EU.
***Tomorrow’s unemployment data is expected to reveal nonfarm payrolls of around 175,000 with a 0.2% increase in average hourly earnings and a jobless rate of 4.8%. Be patient as revisions to last month’s large increase may impact any strong number. If the number is above 280,000 there will be talk of September’s FOMC meeting being in play for a rate rise but after today’s BOE action the FED will be cautious because if Carney fears a large negative impact or supply shock from Brexit Janet Yellen will be loath to raise rates in the face of global headwinds.
Patience is advised in response to a summer market having to decode a great deal of economic nuance. But the most interesting asset class tomorrow will be the U.S. bonds and its reaction to very strong data. Today the U.S. Treasuries rallied strongly on the BOE action, confirming again that global bond markets are all connected by relative value trades. A large nonfarm payroll will test the durability of relative value and most certainly lead to a flattening of the yield curves.
Notes From Underground: The Low Yield of Well-Heeled Boys (Trafficking In Central Bank Counterfactuals)August 3, 2016
Tomorrow the key economic release will be the Bank of England’s interest rate decision. The market is 98% certain there will be at least a 25 basis point rate cut to 0.25%. A majority of analysts also believe that the BOE will increase its asset purchases (QE) from its long, stable level of 375 billion pounds. I DON’T THINK THE BOE IS GOING TO BE AGGRESSIVE AND WILL WAIT TO SEE FURTHER EVIDENCE OF ECONOMIC DATA TO CONFIRM A SOFTENING IN ACTIVITY IS UNDERWAY. A rate cut will accomplish NOTHING except a slight drop in the currency. The recent economic data has been soft but after all the vituperative speech and dire predictions after the vote to LEAVE the European Union, the economy was expected to pause until the market could sort out the hyperbole of negativity.
Was today risk on or risk off? The U.S. dollar continued its recent weakness as the world’s major currencies all rallied against the “safe haven” greenback. The Reserve Bank of Australia cut its interest rate last night but even the Aussie dollar gained against its sister fiat currency. Global equity markets were down as the Japanese Nikkei was weak as the inverse correlated Yen was higher by one-and-a-half percent. Yes, equity markets failed to send the U.S. currency higher.
As I ponder things in the 118 degree heat, it is time for some reflection and perspective:
a. The Bank of England performed beautifully today and took a breath before cutting rates further and/or increasing the BOE’s balance sheet. Now that Prime Minister MAY‘s cabinet is devoid of the idiot George Osborne, it behooved BOE Governor Carney to wait and see if fiscal policy would be the stimulative tool of choice and preserve the monetary policy for future use. I had advised my employers that Carney would be reticent to act because he is a cautious man and his recent plunge into the political realm in cahoots with George Osborne had sullied his reputation. It seems that Carney wants to remove himself from center stage and allow the new cabinet to have a say in just how to provide any stimulus in response to the dire forecasts from the BREXIT outcome.
I am posting today’s story on the Santelli Exchange I taped today. Rick and I were back on the most important topic facing the world: THE ECB’s ROLE IN CREATING A SITUATION THAT MAKES GERMANY LIABLE FOR THE DEBT OF THE ENTIRE EUROPEAN UNION. The world is still abuzz about the BREXIT referendum and its implications for the U.K.. There’s also chatter about what it might mean for other EU nations contemplating STAYING OR GOING in terms of subjecting their citizens to the capriciousness of Eurocratic regulation. The question for me (and will continue to be): WHO GUARANTEES THE ECB, AND, OF COURSE, THE COROLLARY QUESTION, SHOULD ALL SOVEREIGN DEBT BE A ZERO WEIGHTED RISK ASSET CLASS?
It has become standard operating procedure for the FED to enter the market in an effort to minimize the impact of any low probability event with market disrupting outcomes.The BREXIT vote surprised the markets but the FED allowed investors to absorb the financial pain and stayed in the watchtower.
Let’s clear about the mess of Brexit. First, the media is awash with so many opinions from those who had no idea that a vote for Brexit was in the realm of possible outcomes. Yet there is no lack of insights into the end of Britain’s role in the EU. Never have so many people been spewing the hogwash of hysteria into the portfolios of public investors. So in a very typical French philosophical format, let’s DECONSTRUCT last week’s outcomes:
While we’re waiting for the outcome of the Spanish election, I am setting the stage for a larger piece on the market reaction to a high frequency political event. There is a continuing rebuff to the global elites that only reside in their own echo chamber, much of it promoted by the established media. It’s amazing how the policy makers want to believe that the people cannot see behind the curtain. BREXIT was first and foremost a Dorothy/Wizard of Oz result.